PSBs: The New Heroes of Indian Markets

In the past month and a half, the Indian equity market has experienced a significant decline, with major frontline indices dropping around 8 per cent and the broader market indices falling even further. However, the banking sector, particularly public sector banks (PSBs), has shown resilience amidst this volatility. While the banking index has declined, it has done so at half the rate of the frontline market, supported mainly by the performance of PSBs.

Notably, the PSB index has actually risen about 1 per cent over this period, contrasting with a 5 per cent drop in the private sector banking index. This resilience can be linked to stronger-thanexpected quarterly financial results. In Q2FY25, PSBs outperformed private banks in net profit growth, a testament to the impact of recent government reforms and a renewed focus of these banks on customer satisfaction.

The 12 PSBs that reported earnings recorded a robust 39.65 per cent year-over-year (YoY) growth in net profits, significantly outpacing the 20.12 per cent growth posted by 14 private banks in the same period. This marked improvement in PSB performance has sparked a renewed interest in these institutions, which are often overlooked in favour of private sector banks.

The PSB revival can be attributed to sustained government support, vigilant regulatory oversight by the Reserve Bank of India, and a decade of focused reforms to enhance governance and operational efficiency. Increased investments in technology have further reduced the performance gap between public and private banks, making PSBs more competitive. While private banks continue to maintain higher current account savings account (CASA) ratios—an indicator of strong liquidity—PSBs have leveraged their extensive reach and evolving customer strategies to bolster their profit margins.

For investors, this PSB comeback presents an intriguing opportunity, albeit with a measure of caution. The sector’s potential for growth is evident in its healthy profit margins and expanding loan portfolios, but sustained success will depend on maintaining rigorous credit discipline and enhancing operational efficiency. Investors seeking portfolio diversification might find PSBs attractive, supported by a mix of proactive innovation and government-backed stability. With continued reforms and operational improvements, PSBs could offer solid long-term potential.

Our cover story of this issue is dedicated to the banking sector that gives you a detail understanding of the banks on the whole and takes a closer look at how the banking sector may perform in the coming months and whether investors should continue to place their faith in banks. Meanwhile, the latest Quarterly Results have also revealed emerging weaknesses in the FMCG sector, traditionally favoured by investors for its defensive qualities during market downturns.

Currently, the sector is grappling with multiple challenges: weakened demand, a slowdown in urban consumption and pricing pressures due to rising costs. Will the FMCG sector overcome these hurdles? One of our special reports tries to answer this question. Further, in this issue, we feature a special report on SME IPO investing, examining their performance over the past year compared to Mid-Cap and Small-Cap companies. The story includes a curated list of SME companies, ranked based on various key metrics to provide a comprehensive view for investors. I believe the stories in this issue will provide valuable insights into the current equity market and support you in making well-informed investment decisions.

RAJESH V PADODE
Managing Director & Editor